New Zealand Dollar To Weaken as Growth Rate Contracts, Trade Falters

New Zealand Dollar To Weaken as Growth Rate Contracts, Trade Falters

Written by David Song, Currency Analyst

The New Zealand dollar rallied against the greenback for the tenth consecutive week, with the NZD/USD advancing to a fresh yearly high of 0.7161 however, the higher-yielding currency looks to be losing its footing as the economic docket for the following week is anticipated to show a 0.2% contraction in 2Q GDP.

New Zealand Dollar To Weaken as Growth Rate Contracts, Trade Falters

Fundamental Forecast for New Zealand Dollar: Bearish

-    New Zealand Retail Sales Unexpectedly Falls in July
-    New Zealand Manufacturing Sales Slump in Second Quarter
-    Business NZ Performance of Manufacturing Index Weakens in August

The New Zealand dollar rallied against the greenback for the tenth consecutive week, with the NZD/USD advancing to a fresh yearly high of 0.7161 however, the higher-yielding currency looks to be losing its footing as the economic docket for the following week is anticipated to show a 0.2% contraction in 2Q GDP. However, as investors ramp up long-term expectations for higher borrowing costs and speculate the Reserve Bank of New Zealand to tighten policy in the following year, the rise in the interest rate outlook may continue to support the rally from March as market sentiment improves. Credit Suisse overnight index swaps are up 126bp in September, which is the highest reading for the year, and investors may increase bets for a rate hike over the next 12 months as the RBNZ maintains a neutral policy stance.

The NZD/USD bounced back after slipping to a low of 0.6964 earlier in the week, and continued to trade above the 10-Day moving average (0.7037) as market participants moved into higher risk/reward investments. However, as the relative strength index remains elevated and holds above 60 for the second consecutive week, we may see the pair fall back in the coming week as the RSI approaches overbought territory. At the same time, the economic docket is anticipated to show a drop in the growth rate, with economists forecasting 2Q GDP to fall 0.2% from the first three-months of the year, while the annualized rate is projected to contract 2.6% after falling 2.7% in the first quarter, and the data could stoke increased selling pressures on the New Zealand dollar as investors weigh the prospects for a sustainable recovery. Moreover, the current account deficit is expected to widen in the second quarter as trade conditions remain weak, while the trade deficit is projected to increase to NZ$329M in August from NZ$163M in the previous month as foreign demands falter. As the outlook for global trade remains weak, the data could weigh on the growth forecast for the $128B economy as the appreciation in the exchange rate hampers the competitiveness of New Zealand exports, and the central bank may see an increased risk for a slower recovery over the coming months as the rise in risk appetite continues to support the rally in the kiwi-dollar higher.